The development of cryptocurrency has been deemed as a revolutionary alternative to the current financial system. Although one of the hallmarks of cryptocurrencies is that they are decentralized, effective regulation ensures legitimacy. Furthermore, even though the blockchain is extremely secure, humans are still involved in exchanges, trading, and international coin offerings (ICOs).
Rules and regulations create trust and allow people to distinguish legitimate ICOs from scams and Ponzi schemes. Here are some of the current rules and regulations for the crypto market around the world:
Most regulatory efforts start with a warning from the government, typically issued by central banks, regarding the pitfalls of crypto trading or investing. These notices are designed to inform the public about the major differences between cryptocurrencies and fiat currencies, which are issued and guaranteed by the state.
These warnings also include the following:
- Cryptocurrency values are volatile.
- Most organizations that facilitate cryptocurrency transactions are unregulated.
- There is no legal recourse available to people who invested in cryptocurrency and lost their money.
- Cryptocurrencies create opportunities for criminals who engage in illegal activities such as terrorism or money laundering.
Restrictions on Trading and Investment
Most countries around the world still don’t have laws that are intended specifically to govern cryptocurrency markets and transactions. Many of them have simply expanded existing laws on counterterrorism, money laundering, and other organized crimes to cover actors and activities that involve cryptocurrencies.
Others have gone further and created laws that cover cryptocurrency trading and investment. Here are some examples of rules and regulations involving trading and investing:
- All transactions that involve cryptocurrencies are banned in Algeria, Morocco, Bolivia, Pakistan, Nepal, and Vietnam, including those involving trading and investing.
- Qatar and Bahrain ban all domestic activities that involve cryptocurrencies, but allow their citizens to engage in such activities when they are outside their borders.
- Bangladesh, China, Colombia, Iran, Lesotho, Lithuania, and Thailand also indirectly ban domestic activities by preventing any financial institution based within their borders from facilitating all kinds of cryptocurrency transactions.
- Australia allows cryptocurrency transactions, but require exchanges to obtain a market license or a clearing and settlement facility license.
- Korea’s government has publicly expressed its support for legal transactions on exchanges.
- Russia does not recognize cryptocurrencies as legal tender, and has recently criminalized their use as a means of payment. However, a pending bill that is expected to be signed into law this year would make it possible for citizens to trade them on licensed exchanges.
If you are interested in trading cryptocurrencies within your jurisdiction, make sure that you always do your research to ensure which activities you are legally allowed to do. There are tools like Bitcoin Trader that can help you with the research process, as well as in automating certain trading activities to make your life easier and boost your profits.
Regulations on ICOs
Initial coin offerings or ICOs are essentially fundraisers, where developers allow investors to buy into their offering as a mechanism to obtain funds for a new coin or token. In exchange for support, developers distribute a portion of their new coin to the investors.
Keep in mind, however, that investing in an ICO doesn’t mean that you have an ownership stake in the company. You are merely speculating that the cryptocurrency you paid for now will eventually increase in value and make you money.
ICOs, however, opened doors not only for entrepreneurial developers but also criminal minds. Even under the best circumstances, ICOs are extremely risky and have a high potential to be scams. To protect investors from spending their life savings on fraudulent investment schemes, governments around the world are releasing rules and regulations that address ICOs.
Here are some examples:
- China, Macau, and Pakistan have blanket bans on ICOs.
- New Zealand has different treatments, depending on whether the token being offered is a debt security, equity security, managed investment product, or derivative.
- The Netherlands also has varying rules, depending on whether the token is a security or a unit in a collective investment.
- Australia has issued guidelines to determine whether the ICO can be considered as a financial product.
- The United States is currently drafting guidelines to require companies to file an assessment request with the Securities and Exchange Commission (SEC) to determine whether the tokens they are offering are classified as securities or not. If the former applies, the company will then need to submit a whitepaper with detailed information about the project.
Rules on Use as Legal Tender
Although there are countries that have absolute bans on the use of cryptocurrencies as a means of payment, there are countries that recognize its potential and are creating a regulatory regime that is cryptocurrency-friendly.
Some examples of rules regarding the use of cryptocurrencies as legal tender are the following:
- Belgium, South Africa, and the United Kingdom have issued warnings regarding the risks of crypto investments and have also determined that the crypto market is too small to warrant regulation at the moment.
- Belarus, Luxembourg, the Cayman Islands, and Spain recognize cryptocurrencies as legal tender.
- Marshall Islands, Lithuania, and Venezuela have plans to go one step further and develop their own system of cryptocurrencies.
- In the Swiss Cantons of Zug and a municipality within Ticino, even government agencies accept cryptocurrencies as a means of payment.
- Japan is the first country to legalize the use of Bitcoin as a means of payment. Currently, more than 10,000 Japanese companies all accept Bitcoin payments.
One of the biggest challenges for regulatory agencies when dealing with cryptocurrency activities is taxation. In particular, governments have to decide how to classify specific activities for taxation purposes. For instance, profit made from selling or mining cryptocurrencies may be classified as either income or capital gains. The classification will determine the tax bracket that is applicable to them.
Below are some examples of tax rules governing cryptocurrencies:
- In the European Union Member States, profit made from cryptocurrency investments are exempt from value added tax.
- In Belarus, all legal cryptocurrencies and ICO activities are tax-free until 2023.
A lack of regulation is actually detrimental to legitimate cryptocurrency actors. Regulation brings clarity, transparency, and trust to the cryptocurrency market. When a government implements rules for crypto activities, people can easily distinguish between real investments and scams.